Retrenchment, Redundancy, and Severance Pay in Australia: What Employers Must Know

Restructuring, cost-cutting or closing a function sometimes means you no longer need certain roles. When that happens, you may need to retrench employees and pay severance.

Handled well, a redundancy process protects your people, keeps you compliant with Australian employment law and helps your business move forward. Handled poorly, it can lead to unfair dismissal claims, underpayment issues and reputational damage.

In this guide, we break down what retrenchment and redundancy mean, when severance pay applies, how to run a compliant process and what to include in a fair termination package. We’ll also cover common pitfalls and the key documents you’ll want in place.

What Do Retrenchment, Redundancy and Severance Pay Mean?

These terms are often used together, but they’re not identical in the Australian context.

Redundancy

Redundancy happens when you no longer need a job to be done by anyone. For example, you automate a function, merge teams, or close a location. The change is about the role, not the person.

Retrenchment

Retrenchment is the outcome for the employee whose role is made redundant - their employment ends for operational reasons, not because of performance or conduct.

Severance (Redundancy) Pay

Severance pay is the redundancy entitlement owed to eligible employees under the National Employment Standards (NES). It’s separate from other termination entitlements like notice and accrued leave.

The amount depends on continuous service and any applicable modern award or enterprise agreement. Many employers start with a high-level estimate using a redundancy calculator, then confirm the exact redundancy payment against the NES and the employee’s award, agreement and contract.

When Is Redundancy “Genuine” in Australia?

Under the Fair Work Act, a dismissal is a “genuine redundancy” only if all of the following are met:

1) The Role Is No Longer Required

Your business no longer requires the job to be performed by anyone because of operational changes (for example, restructure, reduced demand, new technology, or relocation). The reason cannot be the employee’s performance or conduct.

2) You Complied With Consultation Obligations

Most modern awards and enterprise agreements contain consultation clauses. You need to notify affected employees and their representatives (if any), explain the proposed change, invite feedback, and genuinely consider ways to mitigate adverse effects. Even if no instrument applies, consultation remains best practice and reduces risk.

3) Redeployment Was Not Reasonable

You have genuinely considered redeployment within your enterprise (and any associated entities) to a role that is suitable in terms of skills, location, pay and responsibilities. If reasonable redeployment is available and not offered, the redundancy may not be genuine.

If these conditions aren’t met, an employee may have grounds to bring an unfair dismissal claim. Strong records and a transparent process are critical.

What Must Employers Pay On Termination?

What you pay on retrenchment depends on the employee’s length of service, classification and any applicable award or agreement. Typically, the termination payment includes:

Redundancy Pay (Severance)

Eligible permanent employees may be entitled to redundancy pay under the NES, usually ranging from 4 to 16 weeks based on continuous service. Small business employers (fewer than 15 employees) are generally exempt from NES redundancy pay, but you should still check awards and agreements for additional entitlements.

It’s common to confirm figures using your payroll system, the NES table and the employee’s industrial instrument, then cross-check with a practical tool like a redundancy calculator to sense-check totals.

Notice or Payment In Lieu

Employees are entitled to a minimum notice period (based on service and age), or you can make a payment in lieu of notice if you want the termination to take effect immediately. If an employee works their notice, wages for that period are part of normal payroll and typically attract superannuation in the usual way.

Accrued Leave

• Unused annual leave (and annual leave loading where applicable).
• Long service leave, as required by the relevant state or territory legislation and the employee’s service.

Personal/carer’s (sick) leave generally doesn’t pay out on termination. However, be careful with processes where employees are unwell during a restructure - refer to guidance on managing redundancy and sick leave.

Superannuation

Superannuation is generally payable on ordinary time earnings (OTE). As a general rule, super is not payable on redundancy pay, and it is typically not payable on a payment in lieu of notice. If an employee works their notice, wages paid for the ordinary hours worked during that period usually attract super.

If you plan to use a payment in lieu, confirm your obligations regarding payment in lieu and superannuation before finalising totals.

Other Entitlements

Contracts or enterprise agreements may provide for extra severance, outplacement support, or ex gratia amounts. Always check the contract and any applicable instrument before communicating the package.

Finalising Payroll and Records

Process final pay within the required timeframes and issue an itemised payslip that clearly shows all components. Ensure your Single Touch Payroll (STP) reporting is up to date so the employee can access their income statement via myGov. If you’re not reporting through STP (rare), issue the appropriate PAYG payment summary instead. On request, many employers also provide separation certificates to support a smooth exit.

Tax note: the tax treatment of termination payments can be complex (for example, the tax-free component of a genuine redundancy and how other termination amounts are treated). It’s wise to confirm tax and super treatment with your accountant before you run payroll.

How To Run A Compliant Redundancy Process

A clear and fair process protects your team and your business. The steps below assume you are making one or more roles redundant due to operational requirements.

Step 1: Build Your Business Case And Selection Criteria

Document the operational reasons for change (restructure, technology, demand or location). If multiple roles are impacted, set objective, non-discriminatory selection criteria and keep contemporaneous records of your decision-making.

Step 2: Identify Awards/Agreements And Map Your Obligations

Confirm whether a modern award or enterprise agreement applies to each affected employee. Diarise the consultation steps and timelines set out in the instrument. Even if no instrument applies, follow a robust consultation process to reduce risk.

Step 3: Consult With Affected Employees

Invite employees (and their representatives, if any) to a consultation meeting. Explain the proposed change, the reasons and potential impact. Provide time for feedback and questions. Genuinely consider alternatives raised, including reduced hours or reconfiguration of duties where appropriate.

Step 4: Assess Redeployment Across Your Group

Search for suitable roles across your enterprise and any associated entities. “Suitable” looks at skill match, location, pay, status (full-time/part-time), and responsibilities. Offer reasonable alternatives and record your assessment if no reasonable redeployment is available.

Step 5: Confirm Outcomes And Provide Written Notice

Issue written notice of termination that states the reason (genuine redundancy), effective date, notice period (or payment in lieu), and an outline of entitlements and support. Ensure the notice complies with the NES and any applicable instrument.

Step 6: Calculate And Pay Entitlements

Calculate redundancy pay, notice or payment in lieu of notice, accrued leave and any other entitlements. Process final pay within required timeframes, update STP and provide an itemised payslip. Arrange return of property, revoke system access and remind employees of ongoing confidentiality obligations.

Step 7: Communicate With Care

Where possible, offer support such as references or outplacement. Clear, empathetic communication goes a long way in a difficult period and helps protect your employer brand.

Complex Scenarios And Common Pitfalls

Restructures rarely happen in a straight line. Here are issues to watch for and how to handle them.

Small Business Exemption vs Award Obligations

Small business employers (fewer than 15 employees) are generally exempt from NES redundancy pay. However, consultation obligations in modern awards can still apply. Don’t skip consultation just because you’re small - it’s still a key part of a genuine redundancy.

Genuine Redundancy vs Performance or Conduct

If the real issue is performance or conduct, redundancy is not the right pathway. Using redundancy as a proxy can expose you to unfair dismissal risk. In those cases, performance management or disciplinary processes (e.g. a show cause process) may be more appropriate.

Redeployment Across Associated Entities

The genuine redundancy test looks at redeployment within your enterprise and associated entities. If you operate multiple entities, you need to consider suitable roles across the group, not just within one company.

Employees On Parental Leave, Illness or With Protected Attributes

Special care is required if an employee is on parental leave, has a temporary absence due to illness or injury, or is protected by discrimination laws. The redundancy must be due to operational change, you must consult appropriately, and you need to avoid adverse action.

Fixed-Term and Maximum-Term Contracts

Ending a true fixed-term contract on its expiry date is different from redundancy; severance may not apply where the contract simply ends at the agreed time. If you’re considering early termination or repeated rollovers, get tailored guidance on whether redundancy or other obligations could arise.

Stand Down vs Redundancy

Stand down is a temporary option in limited circumstances (for example, a stoppage of work where employees cannot be usefully employed). It’s not a substitute for redundancy where the role is genuinely not required long-term. Choose the correct pathway for your situation and get advice if you’re unsure.

Superannuation Treatment

As noted above, super is generally not payable on redundancy pay and generally not payable on a payment in lieu of notice, but it is payable on ordinary hours worked (including if the employee works their notice period). Confirm the treatment of each component before you run payroll to avoid underpayment issues and to ensure correct reporting for final pay.

Records And Evidence

Keep clear records of consultation, redeployment searches, selection criteria and business reasons. Provide accurate termination letters, itemised payslips, and, if requested, separation certificates. Poor documentation is a common weak point in defending claims.

Not Getting Tailored Advice Early

Awards, agreements and contracts can change the picture - especially in multi-entity groups or where multiple instruments apply. If you’re dealing with a complex restructure or sensitive scenarios, getting redundancy advice before you announce changes can save time, cost and dispute risk.

Key Documents To Prepare

Solid documentation makes your process clear, consistent and defensible. Consider the following suite:

• Employment Contract: Confirms notice periods, any redundancy provisions and post-employment obligations (confidentiality, IP, restraints).
• Business Case And Selection Criteria: Internal records showing why the restructure is happening and how you selected roles objectively and without discrimination.
• Consultation Letters And Notes: Invitations to consult, meeting summaries and records of how you considered feedback and alternatives.
• Redeployment Assessment: A documented search across your enterprise and associated entities, with reasons if options weren’t suitable or reasonable.
• Termination Letter: States genuine redundancy as the reason, the effective date, notice or payment in lieu of notice, entitlements and how they’ll be paid, and the process for return of property.
• Deed of Release (if appropriate): Used to finalise terms (including any ex gratia amount) and resolve potential claims. Ensure it’s tailored to your circumstances.
• Payroll Calculations And Final Statement: An itemised calculation of redundancy pay, notice, leave and any other components included in final pay, and up-to-date STP reporting so the income statement is correct.

If you’re planning wider changes or ongoing workforce adjustments, standardising your letters, checklists and workflows now will make future processes smoother and more consistent across the business.

Key Takeaways

• A genuine redundancy is about the role, not the person - it requires a business need, proper consultation and a real check for reasonable redeployment (including across associated entities).
• Termination payments typically include redundancy pay (if eligible), notice or payment in lieu of notice, and accrued leave, with super generally payable on ordinary hours worked (not on redundancy or payment in lieu).
• Plan your process: build a business case, set objective selection criteria, consult in line with awards/agreements, document redeployment efforts and issue compliant notices and payout calculations.
• Use practical tools to estimate entitlements, then confirm exact figures against the NES, any applicable instrument and the contract - start with a redundancy calculator and lock in the final numbers before processing final pay.
• Complex scenarios (small business status, fixed-term arrangements, employees on protected leave, multi-entity redeployment) merit tailored redundancy advice to manage risk.
• Keep clear records and provide accurate, up-to-date STP income statements; on request, issue separation certificates to support a respectful exit.

If you’d like a consultation on managing redundancy, retrenchment and severance pay for your workplace, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.